Every week in 2019 keeps getting crazier. We got inverted yield curves. We got traded wards
We got negative interest rate and the negative interest rates in particular
They might seem backwards to a lot of people but actually they’ve been around for years
The first country to dip their toes in was Sweden back in
2009 right after the great financial crisis when the SP was just coming back up to a thousand and then five years later the ECB
Cannonballed into negative interest rates too, and then there was no looking back
According to market watch some banks in Denmark are offering a negative 0.5 percent rate on a ten year fixed mortgage
So technically if you moved to Denmark you can borrow money to buy a house and then pay back
Less than what you owe on and as offensive as that might sound it’s actually true
But today I want to talk about what negative interest rates actually are and how they work
And also what it means for the economy, I mean is the bank gonna pay you to take out loans?
we’re gonna talk about all of that on this week’s episode of real visions, but one thing
What’s going on investors
8k here ever since the end of July when the Fed cut interest rates by 25 basis points, the markets have been in chaos
The S&P is dropped VIX his spikes and the 2 in 10 curve is inverted
So now of course everybody’s talking about interest rates again, and nowadays when you’re talking about interest rates
the topic of negative interest rates comes up to last week the Fed reaffirmed that they’re not looking to use negative interest rates in the
US but that it is one of the tools in their toolbox that being said negative interest rates border on
sacrilege for a lot of American investors
Just listen to Peter book vars comments about what the Fed would do earlier this year
The feds can achieve a slowdown and what is if I gonna do are they they’re gonna cut rates. That’ll be their initial reaction
But where are they gonna take this?
Are they gonna do what they’ve done in the past and what the eyes I mentioned the other central banks have done and have trapped
Themselves they can repeat the mistakes of every other central bank and just cut back to zero and do QE at some point
You know if anything the lesson from I keep talking about the yield curve
it was one of the flaws of QE outside of QE 1 which was meant to
Literally sort of save the system qe2 qe3 was on paper meant to lower long-term interest rates. Well, that’s a flattening of the yield curve
How are you going to encourage lending when you’re flattening a yield curve?
Maybe the answer to his question is negative interest rates
But okay before you move to Denmark
You’ve got to know what a negative interest rate is and why it matters
so negative interest rates basically work the same way as positive interest rates, but in Reverse
So say I lend you $100 with the annual interest rate of 10%
Well a year from now you better show up with a hundred and ten dollars, right?
But the interest rate was zero then all I would need is that hundred bucks back?
But if the interest rate is negative ten percent, then you only owe me 90 bucks
So the difference between a 10 percent zero percent and negative 10 percent interest rate. Is that same 10 bucks?
The negative one seems a little more weird, right?
Because why would I lend that money to you when I could keep it for myself and have that same amount of money a year?
Later without any of the credit risk, so a negative interest rate
Would D incentivize me to loan out money?
but at the same time it’s gonna
Incentivize you to borrow more and in a world where there’s a lot of money flowing around but not many
Projects to use it for this might balance the loan Janet Makana he explains more a financial system
Is like a reactor a structure that contains?
Into reaction between elements so in the financial system the dominant elements are
borrowers and lenders
Transfer funds to borrowers and then borrowers transfer that back with interest
Hopefully sometimes that goes wrong what we’ve seen is within that reactor
Central banks have been trying to use extraordinary policies to stimulate
Interaction and the way they do that is to reduce the flow of interest
From the borrowers back to the lenders and indeed now with negative rates. They’ve reversed the flow completely
They’re trying to stimulate outputs such as inflation, and it’s very hard to see and measure
How successful that has been central bankers around the world have two main tools that they use to manage the economy
Asset purchases and interest rate those two are pretty closely related
So you remember the zero lower bound idea where interest rates couldn’t go below zero
that was one of the
explanations that the Fed gave for quantitative easing because
Rates couldn’t go below zero. They had to create money to buy assets and stimulate the economy
But now the european central banks are pointing in laughing because they’ve broken that so-called zero lower bound. So what about the u.s
our negative interest rates inevitable here – well in this clip Tony Greer talks about how central banks around the world are paying attention to
each other so the US might be next in the FOMC statement Powell actually mentioned things like the brexit and
The debt ceiling as reasons for concern and that’s when I want to you know
Grab the television screen and go are you kidding me? You know, that kind of thing is outrageous to me
So we’re not managing our own economy with our own interest rates or our own currency within our own borders
So it seemed like we should be most attentive to what’s going on here
That’s not the case anymore
so that’s why you’ve got to watch and see what’s going on around the world because it seems like the
powers that be or the central banks have done a pretty masterful job at
Managing coordinated currency destruction, right? We’re all lowering rates around the world at the same time and it’s everybody in the boat
So like most beer isn’t saying that we’re absolutely gonna get these negative interest rates
But he’s saying the banks do pay attention to each other for people like Greer book Farr and many others
There’s a psychological barrier to accepting negative interest rate
But on the heels of recession watch a crisis could be what everyone needs to rethink their position so you might not be getting paid
To take out a loan like the people in Denmark but negative interest rates are becoming more plausible in the u.s
If you want help tracking the crisis so you could avoid it or if you just want more help
Understanding interest rates and negative interest rates, then definitely subscribe to real visual. I’ll talk to you next week